Monetary Policy, Time-Varying Risk, and the Bond Market Debacle of 1994

George Mason University Working Paper No. 97.08

35 Pages Posted: 23 Mar 1998

Date Written: July 1997

Abstract

Bond prices plummeted in early 1994. These losses occurred while the Fed was raising interest rates. John Y. Campbell argues that the Fed could have triggered the losses either by communicating information about incipient inflation or by increasing uncertainty about monetary policy and thus required returns. This paper presents an intertemporal model relating asset returns to news about future inflation, interest rates, risk premia, and dividends. Using this model to shed light on the empirical work it finds that both expected inflation and monetary policy uncertainty help explain the bond market debacle of 1994.

JEL Classification: E44

Suggested Citation

Thorbecke, Willem, Monetary Policy, Time-Varying Risk, and the Bond Market Debacle of 1994 (July 1997). George Mason University Working Paper No. 97.08, Available at SSRN: https://ssrn.com/abstract=65009 or http://dx.doi.org/10.2139/ssrn.65009

Willem Thorbecke (Contact Author)

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F 3-2-5
Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008
Japan

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